Since then, stock prices have recovered a bit. But will investors feel constrained by the decline in their portfolios to limit spending?

A number of Fed economists have explored this question, and answer, "Yes."

Indeed, it already has, these economists reckon. Consumer spending has declined from a 5 to 6 percent annual growth rate in the late 1990s to about 3 percent in the first quarter of this year, partly because of the "wealth effect" from falling stock prices.

They doubt the weak stock market will drag personal consumption growth down to zero or lower. If it does, they say, a recession would be just about certain.

Even if they are right and personal consumption spending stays at least positive, pulling out of the current economic slump will still take time.

A paper on the Fed's website (www.federalreserve.gov) calculates that an additional $1 of stock wealth has probably resulted in 5 cents of extra consumption over about two years - maybe as much as 15 cents.

The paper - written by Dean Maki, who was with the Fed until last November and is now with Putnam Investments in Boston, and Karen Dynan, senior economist at the Federal Reserve Board in Washington - indicates that scenario holds even for investors with moderate amounts of stock wealth - under $100,000.

The reverse pattern, Mr. Maki assumes, holds after a drop in stock wealth. The wealth effect for flush shareholders, however, may be weaker.

Stocks 'not overvalued'

The Fed is the largest employer of economists in the nation - and quite a few of them have been doing research on the stock market lately. Perhaps some were inspired by Fed Chairman Alan Greenspan's question in late 1996: Is the stock market affected by "irrational exuberance"?

Ellen McGrattan and Edward Prescott, economists at the Fed branch in Minneapolis, have attempted, in effect, to answer Mr. Greenspan's question.

In an unpublished working paper posted on the bank's website, the two maintain that stocks are not now overvalued.

If stocks prices were to tumble badly as suggested by some market bears, say in half, McGrattan notes, "I would start buying."

Economists have long puzzled over what is the appropriate average price for stocks. Yale University economist Robert J. Shiller has won considerable attention with his book, "Irrational Exuberance." His traditional analysis looks at stock prices in relation to corporate earnings and finds stocks today to be "pricey."

Tax changes boost stocks

McGrattan and Mr. Prescott use a different measure to explain why the value of all corporate shares relative to gross domestic product (GDP) - the nation's total output of goods and services - is twice what it was in the early 1960s. It is due to tax system changes that make investment in stocks more attractive.

Marginal income-tax rates for the wealthy, who own the bulk of stocks held by individuals, were cut under President Kennedy in 1963 from 91 percent to 70 percent. Two cuts under President Reagan slashed those top rates to 33 percent. They went back to 39.6 percent under President Clinton, and under President Bush are coming down again.

More important, dividend income can be sheltered from taxes in various retirement accounts. More than half of corporate equity is now held in retirement accounts, such as 401(k)s, and in pension fund reserves. (In the 1960s, virtually no stock was held in tax-deferred retirement accounts. Americans invested mostly in bonds. And people owning stock paid a 50 percent tax on dividends.)

These two tax changes, the two economists theorize, explain why stocks have performed so much better than bonds in recent decades.

Their work also implies that the "golden era of the stock market is no more," says Mr. Prescott. Stock market returns will be halved in the future.